177 entries from June 2006

June 30, 2006

Here's another excerpt from Wealth by Stuart Lucas. I liked the book -- giving it 6 stars. So it's my pleasure to offer this excerpt from Chapter 8:

It should come as no surprise to you that taxes rank as either #1 or #2 on the list of expenses for the wealthiest Americans. In 1998, for example, my family paid seven times in taxes what we earned in profits in one of our investment entities! Today, taxes are our second biggest leakage behind spending, and without careful planning they would be the biggest.

By comparison, many institutional investors—pension funds and endowments, for example, that have billions of dollars in investments—don’t pay any taxes at all.

So what can you do to responsibly minimize your taxes?

While tax efficiency is a critical element in your investment strategy, most investment managers don’t concern themselves much with tax minimization because doing so doesn’t reap them any bottom-line benefits. After all, they are evaluated on pre-tax performance by almost everyone. But I’m here to tell you that evaluating your after-tax results is important. I will also tell you that, managed well, taxes can be your ally in the wealth management planning process.

The way the U.S. Tax Code works, the wealthier you become, the more control you have over how much you pay in taxes and when you pay them. There are also numerous incentives in the tax code that work in your favor to reduce risk and to help your assets grow more quickly.

Take-Away #1: U.S. Taxing Authorities Are Your Investing Partners

In previous chapters, I’ve talked about your partners in the wealth management process—accountants, lawyers, and investment managers. I have not included the Internal Revenue Service or your local taxing authorities in this list of wealth management partners—until now.

Today, federal income taxes are the largest source of federal government revenues, about 45% of the total. This is over 10 times the revenue typically generated by capital gains taxes. If the government needs a large revenue boost, it traditionally (and will likely again) raises income taxes significantly.

It may increase capital gains taxes at the same time, but the likelihood that they would ever equate with income tax rates is highly unlikely. Most likely, capital gains taxes will continue to be significantly lower than income taxes.

All that said, I prefer to think of U.S taxing authorities as investment partners, as opposed to adversaries. I also view that partnership in unconventional ways, which I describe in the following paragraphs.

First, when designing a wealth management strategy, it’s important to remember that, although the government sets the rules for how to calculate taxes in the tax code, the government in fact acts like a silent partner. Each taxpayer is left to apply the code’s rules to his or her own advantage. (More on this in Take-Away #2.) Our actions and decisions have an enormous impact on our tax liabilities!

Second, unlike accountants, lawyers, and investment managers who make money off your assets through fees, regardless of how well your investments do, tax authorities only benefit if you generate profits. If there are no profits, or profits are deferred, Uncle Sam doesn’t get paid.

Third, in exchange for taxing you, the government provides you with a wide range of services including defense, emergency services, a system of law, economic management, social security, and community infrastructure, such as roads, schools, and the like. All these are critical to ensuring a stable society, guaranteeing free commerce, and enabling you to get wealthy in the first place. Just how many billionaires do you know in the Sudan?

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A couple comments on this:

1. Evaluating your after-tax gains on investments is the proper way to evaluate them. In fact, you should deduct taxes, fees, and any other costs to get your bottomline return, then compare investment options to each other. After all, you want to make decisions based on what each investment puts in your pocket -- not what it earned you before a lot of other items were deducted.

2. Looking at the government as a tax partner (rather than an adversary) is one of the most interesting, unique, and compelling ideas from this book. Obviously the book gives greater detail than this excerpt, but this at least gives you a taste of what it says.

I want to thank Stuart Lucas for sharing these parts of his book. They've been quite enjoyable to me and I trust to you as well.

A few weeks ago I ran some excerpts from the book The Big Money and also had Fred Kobrick, the book's author, do some guest posts here at Free Money Finance. Over the course of a couple posts, we had a discussion on the importance of company management when deciding to purchase an investment. It started with Fred's #3 guest post where I asked:

You talk a lot about the importance of management when considering a stock purchase. I've recently made two stock purchases where management was a big factor pushing me to buy. The first was Disney (DIS) and the latest was Home Depot (HD).

I'm currently thinking of buying JPMorgan Chase (JPM), again in part because of their leader. Jamie Dimon just seems to me to be the kind of get-things-done sort of CEO who is destined to perform well.

Can you comment on the following:

1. In general, how much weight you put on management (versus other factors) when you decide whether or not to buy a stock?

2. Specifically, your thoughts on DIS, HD, and JPM both as stock buys/no buys as well as the skill (or lack thereof if you think so) of their top managers.

Fred responded:

On the importance of management, let me start with this quote from my book, keeping in mind that with the four factors (BASM) that identify the greatest wealth stocks, management is responsible for them, starting with a great business model:

“This is one of the most important chapters in this book, and for some people it will be the most important. For some, picking stocks on the basis of management will be all they need to do.”

This begins the chapter on management but I would urge people to keep reading and see what the characteristics of great managements are. Remember, BASM guides the investor to find the great companies very early, and BASM is the golden goose that lays those golden eggs of earnings.

Thus, if you only define a great management by its earnings track record, you will come into the stock much later than some others, and it may be a very good investment, but not a “Big Money” or wealth stock to make you rich for life.

So, with the 3 companies you name—Disney, Home Depot and JP Morgan, I have met all these managements and think very, very highly of all three.

There are two things that are important to know, here.

First, they are all big and so while they are going to be good investments over time (not quick trades), they are not going to make people rich for life in my opinion. They already did that, and the first two are detailed in my book as stories with lessons as to how they did that and how people recognized them early.

JP Morgan is over $80 billion in revenue on it s way to $100 billion, and even more than that—the second thing—it does not control its destiny as much as the other two stocks.

I say in my book The Big Money that the amount of control over destiny a company can have vs. the amount that its destiny is controlled by the economy or outside factors, is a degree of how great it can be. JP Morgan is very good and will do well for investors, but it is subject to changes in the economy and interest rates more than the average company and one needs to understand that.

Also, JPM is up over 32% the past 12 months, and is somewhat expensive relative to its own historical price earnings ratio, while analysts on Wall Street see growth for the next 12 months to be somewhat slower than the last 12. So, just know that.

I hope that helps you.

The conversation continued to a later post (an excerpt from the book) on how to pick great company management (and thus, a great investment). At the end of the excerpt I said, "This is one metric that I give pretty heavy weight to when buying a stock. On two recent purchases of Disney (DIS) and Home Depot (HD) stock, top executives were one of the main reasons I went ahead and bought the stocks." To this post, a reader responded:

How does one exactly go about evaluating the executives of the company? The things that you listed are somewhat subjective. How does one tell a crook from a visionary, especially when you are not very familiar with the industry? I'm interested in whatever that you could elaborate further. As on how I do it, I just go by financial numbers.

I explained my thoughts:

There's not a single method, but I can describe how I came to believe in the three leaders I noted on Fred's other post.

With HD, I've followed Nardelli since he "lost" the race at GE. Often a smart guy spurned is a powerful force -- he's out to prove something -- so I've watched him. Recently, the fundamentals of HD were attractive. I then read a positive story in Business Week (and listened to their behind the scenes podcast) and it reinforced much of my thinking about HD. So, I took the plunge.

With JPM, you've got the "smart guy spurned" issue working again. In addition, I did a bank deal at my last employer just at the time when one of the banks we were considering merged with Dimon's bank. The execs I was dealing with had met with Dimon and said he was the "real deal". His performance since then seems to back up their feelings, and while I haven't purchased JPM yet, it's on my short list.

Fred responded with his thoughts as well:

I know it seems frustrating or potentially hard to evaluate the executives of a company. Like most good investment issues, experience is the best teacher, and if you want that experience with somebody else’s money first, as well as lots of it with guidelines to boot, you need to study the experiences of investors before you and what they did to solve these problems. That is why I wrote the book as what we call “the case method”, or condensed experiences with lessons.

All the top investors have learned that way. So, when investors want to boil it down to a few simple rules, they should realize that this is why people fail to get rich—a few simple rules will not make you millions. The quick fix books come and go over the decades, and people still try, but find me the people that have read all the quick fix books in each generation and ask them if they finished the book let alone where their yacht is.

I have a chapter that is fun like the rest of my book, and uses great examples like McDonald’s to teach about management—but, I have already quoted from that chapter in this site, and if you have not read that stuff yet, you have to ask yourself if you are in the quick fix camp and will stay their all your life, or if you truly, truly, want to get rich and read and use a few hours a week to do so. I do realize that much of what people try and read is worthless, but go to a bookstore and thumb through my book, or look at al the excerpts and quotes on this site, and you should see what I mean about using your common sense and having a compass to guide you to just the four key factors of the wealth stocks.

The same goes for crooks---my example of how Sambo’s restaurants in the 1970s taught me what I needed to know to avoid Enron in the 1990s is a great, fun story, and that chapter tells you what you want to know. Thumb through it in a bookstore if you want more, or actually use a few books and try the book—you have a lot of preview material right here.

ONE simple things is that when you learn how to look at a company’s business model and you look at an annual report and either they have not made the business model clear or how they describe their operations or earnings reports, never, ever feel dumb, just know that they are doing a lousy job of reporting to you, or they cold even be crooks. But some case experience and personal experience is what ultimately guides people to know how to recognize the great stocks and the crooks—it will never be a few simple rules, in my opinion.

I'm a big believer in buying (a few) stocks based on very strong management. It seems to me to be a solid practice and in more cases than not has made me a great return (Jobs at Pixar, Jobs at Apple, Gerstner at IBM, Gates at Microsoft, Lafley at P&G, etc.).

Here's the last giveaway in this long series -- one that started in May!

Our winner of yesterday's Career Intensity book giveaway was: Phillip (comment posted at 11:48 am yesterday) Congrats! Be sure to email me the name and address where you want the book to be sent as well as if you want the author to sign it for you or to a special person (I'll need the name). I'll send you a confirmation email that I got your note. If you don't hear from me, I didn't get your email. BTW, the books are shipped out every Friday by media mail, which can take 2-3 weeks to receive from the time they are mailed.

For the rest of you, there's another giveaway today. Here's how the giveaway works:

2. All you need to do is leave a comment on that post (only one comment/entry per person, please). This will enter you in the drawing for that day.

3. Sometime the next day (usually in the morning, but not always, my schedule won't allow it) I'll announce the winner for the previous day's giveaway as well as the new giveaway for that day. This time, I'll wait a few days and announce the final winner on July 3.

4. If you're named the winner, you'll need to email me the name and address where the book should be sent. Note: I will not be sending you an email telling you you've won, you'll need to check the site. If you want to look at all the posts/winners, click on my giveaway category link. If I don't hear from you in a week, I will give the book to someone else.

As for rules, they simply are:

1. If you leave more than one comment on any one giveaway, your entries will be invalid for that particular giveaway.

2. Once you win a book, you can't win another one. But if you have won a previous giveaway here at Free Money Finance, as long as it wasn't for this book, you are eligible to win this book.

3. The drawing will be final and I will be the complete and final judge.

4. U.S. mailing addresses only.

Good luck! Post a comment below for a chance to win Monday's giveaway!

1-3. The first three are related in my mind. People simply need to realize that they need relatively little (food, water, shelter, etc.), want a lot (of which they need to choose what to buy and what not to buy), and desire many things that simply aren't practical given their finances (a second house, an expensive vacation every year, etc.)

4. Regarding item #4, I want to share this quote:

The good news, of course, is that even with opportunity costs, college is a slam-dunk for most people. The average graduate makes 70% more over his or her lifetime than someone who stops with a high school diploma.

6. Yep, I've been here -- mostly in my early investing days. This is a lesson that every investors usually learns the hard way -- and if they don't learn it, they end up losing a ton of money through the years.

Want to save $1000 this year for very little effort? Gift giving is an area where impulse buying is a frequent occurrence. I was amazed to discover I was spending over $1500 or more per year for gifts. What have you spent for gifts in the last 12 months? In my experience, gifts were last minute purchases for which money was no object. I now spend less than $500 per year for gifts. Take two hours of your life and save yourself $1000 or more per year on gift giving.

Get Prepared

Label 12 manila folders January - December. On the front of each monthly folder, write the days of the month. Next to the appropriate date on the folder, write in the occasion for which a gift and/or a card will need to be purchased. Then, write the amount of money you will spend on that gift. Inevitably, a wedding or birthday will come up that you didn't know about, so be sure you leave a little money left for these unexpected occasions.

The key is, don't exceed what you budgeted for each gift. For example, for Mother's Day, I will write $15 next to the holiday. I only allocate $400 for the known holidays and set aside $100 for the unexpected gifts such as a wedding or birth of a child. You may find that you are unable to budget $500 a year for gift giving. Just determine what you can afford and STICK WITH IT. Don't deviate from your budget.

Advance Planning

There are very real benefits to planning your gift-giving in advance. And, with a little creativity, you can bring your overall cost down substantially. Because you're prepared, you can actually enjoy the holidays. You won't feel financially strapped since you've budgeted for the gifts in advance. Since you've anticipated the gift-giving occasion, you will undoubtedly find the gifts on sale. It goes without saying, but the idea is, NEVER PAY RETAIL - EVER!

Frugal Gift Ideas

Buy gift-wrap and greeting cards on sale, or better yet, make them yourself.

Shop for gifts all year long to get the best price. This may mean you could be buying Christmas cards in January.

Plant an herb garden for a friend. And, while you're at it, make one for yourself too.

Treat your partner/spouse to a homemade spa. Give him/her a gift certificate announcing a full one-hour body massage and facial. This gift is easily worth over $75!

Organize personal negatives and photographs for a friend or family member. Create a scrapbook, photo books, or even Photo CDs.

Make some creative hand puppets for a child if you have mismatched socks and buttons lying around your home.

Create a care package for a friend who recently got a new job. In a box or basket put some instant coffee, tea bags, aspirin, bandages, travel size toothpaste and toothbrush, along with a coffee cup. If the friend is a female, add some trial size products such as perfume and hairspray. If you want to increase the value of the gift, give a portable umbrella.

Design a similar package for a recent high-school graduate student who will be entering college. You may want to even provide a $5 phone card instead of an umbrella.

Buy movie tickets... a gift where one size fits all. When movie tickets are purchased in advance from movie theatres, you can usually get them at half price!

Offer to make dinner for your friends if you're a good cook.

Give a single friend or elderly family member freshly frozen dinners for a week.

Mail out holiday cards for an elderly family member. if you're computer literate, put their address book into a database so the information can easily be updated.

Make a year's worth of greeting cards and personalized stationery for someone if you're a bit crafty. Make enough birthday cards, anniversary cards, and blank cards for a year's worth of holidays. The thoughtfulness will go a long way throughout the year.

Help someone else get organized. If the person you need to give a gift to is an entrepreneur or extremely disorganized, make a filing system for the upcoming tax year.

Purchase gift-with-purchase cosmetic/perfume specials and split the gifts. Usually the gift is nicely wrapped, generic, and valuable enough to give away for an upcoming gift in your tickler file.

Getting Organized

In a drawer or closet, place the gift giving manila files, the greeting cards, gift-wrap and purchased gifts in chronological order. This is now your tickler file and shopping list to remind you what holiday is coming up.

One comment I want to really emphasize is the last one made by the article -- that most people aren't saving for retirement outside their 401k's (and those are underfunded). It's likely that most of the people reading this will not only need to save through their 401k's, but also have additional savings, to get to the amount they need for retirement. The only way to know if you need to or not is to set your own retirement number.

The first person to leave a comment, any comment, below wins a free copy of Career Intensity.

Once you comment and see that you're first, be sure to email me the name and address where you want the book to be sent as well as if you want the author to sign it for you or to a special person (I'll need the name). I'll send you a confirmation email that I got your note. If you don't hear from me, I didn't get your email. BTW, the books are shipped out every Friday by media mail, which can take 2-3 weeks to receive from the time they are mailed. If you want to look at all the posts/winners, click on my giveaway category link. If I don't hear from you in a week, I will give the book to someone else.

As for rules, they simply are:

1. Once you win a book, you can't win another one. But if you have won a previous giveaway here at Free Money Finance, as long as it wasn't for this book, you are eligible to win this book.

When push comes to shove, investing is a tough business. For that reason, it’s probably best that most investors limit their investment ambitions to the world of The Capital Kibbutz. And there’s nothing wrong with that.

Of all the investment instruments available to investors in The Capital Kibbutz, there is one that is ideal for most investors to consider using. It’s not a glamorous, exciting solution. It doesn’t mirror the bold impetuosity of the Country Club Gambler. Nor does it embody the secrecy and mystery of The Secret Society. Even the term to define it isn’t terribly compelling. But it is truly the best way for most investors to go. It’s called “indexing.”

Briefly stated, indexing involves investing in a statistical composite of securities that mimics the characteristics of an entire investment market or asset class, like the S&P 500, the Russell 3000, the Wilshire 5000, or other well-known, broad-based indices.

Because most index funds contain a broad and representative cross section of desirable financial markets, there’s no portfolio manager trying to improve performance by buying or selling individual securities. For that reason, most of the well-designed ones create very little in the way of investment fees, brokerage commissions, or capital gains taxes—at least until the index itself is sold.

So, should you pin your wealth management strategy on effective use of index funds? Consider this: Approximately $3.5 trillion of America’s pension plans are indexed, or about a third of the total. This is up 400% since 1990.

Corporations know the value of indexing. In the last 20 years, most large pension plans have gone from having dozens of portfolio managers with various risk strategies to having a core stock portfolio that is indexed to a broad market benchmark.

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals,” notes Warren Buffett, Chairman of Berkshire Hathaway, and considered by many people to be the world’s most astute investor.

But despite Buffett’s advice, individual clients have been surprisingly slow to embrace indexing. After all, most individual investors don’t have the expertise to build the Four A’s needed for Active Alpha Investing. What’s more, the case for indexing is actually stronger for individuals than it is for institutions for two reasons:

1. Indexing is tax efficient relative to active management. This can save taxable investors a lot of money, but is of no benefit to pension plans or endowments.

2. While most private investors can’t compete with institutions for access to the best active managers, they do have access to the same indexed products as institutional investors do at almost the same cost. Indeed, for index products the fee differential between institutions and individuals is a mere .2% or less. By contrast, in the case of active management, the fee differential (between individual investors and institutions) is often a half a percent or more.

Our winner of yesterday's Career Intensity book giveaway was: Chris M. (comment posted at 12:18 pm yesterday) Congrats! Be sure to email me the name and address where you want the book to be sent as well as if you want the author to sign it for you or to a special person (I'll need the name). I'll send you a confirmation email that I got your note. If you don't hear from me, I didn't get your email. BTW, the books are shipped out every Friday by media mail, which can take 2-3 weeks to receive from the time they are mailed.

For the rest of you, there's another giveaway today. Here's how the giveaway works:

2. All you need to do is leave a comment on that post (only one comment/entry per person, please). This will enter you in the drawing for that day.

3. Sometime the next day (usually in the morning, but not always, my schedule won't allow it) I'll announce the winner for the previous day's giveaway as well as the new giveaway for that day.

4. If you're named the winner, you'll need to email me the name and address where the book should be sent. Note: I will not be sending you an email telling you you've won, you'll need to check the site. If you want to look at all the posts/winners, click on my giveaway category link. If I don't hear from you in a week, I will give the book to someone else.

Let's face it grocery shopping can take a bite out of your paycheck. While this isn't an expense that you can eliminate, there are ways to make it more affordable.

I realize at this point that you never valued $10 so much before in your life, but now you will! A good way to save money is to shop with just as much cash as you feel you will need. This is one way to ensure you do not go over you budget.

The key to grocery savings is not to be brand loyal. Always watch the grocer store circulars and use coupons in conjunction with a store sale price, or better yet find a buy one-get-one-free sale. Be a smart grocery shopper. Use all of the coupons and grocery cards you can for items you need to purchase.

Grocery Shopping Suggestions:

Eat before you go grocery shopping so you won't be tempted to make impulse purchases.

Don't forget to buy the generic or store brand for those items where a brand name is not necessary: sugar, flour, toilet paper, paper towels, napkins, etc.

Stock up on food staples when they are on sale.

Buy store-brand cereal instead of national brands. If your household goes through a box or more per week, you can save over $100 per year by purchasing store brands.

When buying pre-packaged fruits and vegetables for a flat cost, i.e. 5 pounds of potatoes for $1.88, actually weigh the bags and find the bag that weighs more than 5 pounds.

Check out the price per ounce/pound/piece. Just because it is a big box, doesn't mean it's cheaper! Sometimes two smaller packages are cheaper than the big box. Compare prices ounce per ounce.

Stretch the food that exists in your cupboards. I bet you have enough odds and ends to last you at least a week in meals if you're creative. I have learned to make wonderful meals out of rice and beans, noodles, and herbs.

When you cook a meal, cook twice as much and freeze the leftovers. This works great with cookie dough too.

The weeks when the sales are not so good could be light buying weeks. If you have some food in reserve, on these light weeks the extra food is like money in the bank. If you ever hit a rough patch, you might have enough to carry you through that time.

Maybe the answer for you will be to develop a hobby, such as stamp collecting or visiting Civil War battle sites, into a major, time-consuming, non-paying pastime. But on the other hand, you could find that the best way to replace the rewards you receive from work is to keep working — especially if it's a different, less stressful job, with fewer hours, a new boss (maybe even yourself), and a new focus.

The best time to give serious thought to this issue is before you retire from your main job, before you burn any financial or social bridges. Planning ahead will also give you time to negotiate a new role with your current employer or, if you want a change — such as working for yourself or starting a small business — to get your financial ducks in order before your paychecks stop.

In our fast-paced world, it's all too easy too assume that the only retirement planning required is to figure out how much money to amass in a 401(k) or individual retirement account. But money is not the only valuable resource available to spend in retirement. Another is your time. As with the money, it would be a shame to waste it.

Very good points to add to this discussion.

Personally, I hope to never retire. I'd like to volunteer at a non-profit organization, downshift into a more "fun" job, or develop a hobby into an income.

Instead of moving to a cheaper area, I have often thought that if you lived in an expensive area from a housing standpoint and are able to make enough extra money to cover most or all of those extra costs that in the end you will be ahead.

Namely, work in that environment for 20 years and then sell your house and move to a much cheaper area of the country. Now you will have built equity in that house that far exceeds the equity you would have achieved in a much cheaper area of the country and you will pocket the difference when you move.

Is there a hole in that theory?

I'm not sure -- you tell me. It's certainly worked for people who bought houses in California 20 years ago and are now moving to Montana with enough money to buy a small subdivision. But can that be replicated consistently? I'm not so sure.

Here's our next comment:

I like San Jose, California. Some people may say that this place is over priced, traffic congested and jobs are hard to come by, but I see the opposite. In fact, this has been a place of opportunity for many of us. Terms of price - it's what the market bears...if you bought a home several years ago, you made a good return within a year - as much as 25%, and though the Real Estate market seems to be softening, newer homes on the market seem to be priced reasonably (especially condos), good enough for first time buyers to "invest"..and the best part of that is, in a few years, they will still make more money in terms of their equity, than other places I can think of else where in the U.S. (I am sure there are other places though.).

As for jobs, hi-tech is here, but there are a plethora of other industries that people can get into from the government sector to private/commercial industries (retail, construction, service, etc...).San Jose may not be the fastest growing city in America, like it use to be, but it has been noted as the safest big city in America, the healthiest city, and the cleanest city...and one other thing of note.a city of TRUE DIVERSITY...if you ever heard the term a "beige soceity"..come to San Jose California...it's truly a place where the minds and cultures from around the world come together, and makes my home one of the Great American Cities of our era.

I never said that people shouldn't live in one place or another, I've simply pointed out that there's a (big) cost difference in living in say New York versus Cincinnati. Obviously, you can choose to live where you like and spend what you like -- but there are alternatives. That's all I'm saying.

Here are some thoughts from a different perspective:

It's worked for my Apex. With the big city (san francisco) salary, and getting a house, I've gone very far. The big mortgage works out to a big tax break, dropping me down to a very low bracket, such that I'm able to pay the mortgage and still put 10% into 401K. Albeit, I can't save much outside of this, but 2 years into the market I just sold my condo to move into a home with even better appreciation rates, and I'm still 6 figures richer after I paid my real estate agent, which allowed me to pay off all my debt and build my emergency fund. The mortgage on the new home will be tougher, but even at depressed appreciation rates I'm looking at 10% on a 750K value every year leveraged off a small down payment.

I love FMF's advice, but there are always exceptions, and in this case, I think it works. Would it work for a family with children? Probably not, but for a single income high wage earner in a big city, it's turning out quite well indeed, especially at a young age (I'm 30). I'm planning on putting at least 10 years into this home to ride any depressions, then I'll probably skip town and buy a nice home outright, while leveraging my equity to build up some investment property along the way and continuing to pound my max into the 401K.

My goal? Rental income and a few side streams by age 40 so I can quite corporate America, then enough investment income and side streams by 50 to get out of the rental market. I'll be too old for the hassles. 50 on? Business as a hobby and community service sounds good about now.

Why do people always tout all the money they save on taxes by having a mortgage? Don't they know that they're paying more when you look at interest plus (reduced) taxes versus (higher) taxes alone?

Yes, there are exceptions, but the real estate market we've seen the past several years is not something you can bank on. It's like using 15% return to project your retirement savings. It's just not prudent or practical.

Next is a short comment that realizes that there are trade-offs:

I enjoy the diversity and culture of the New York area, but it comes at a high cost of living.

Finally, we end with this comment, from the tourist bureau of Chicago:

I live in Chicago and have most of my life, besides living in Sydney, Australia and Minneapolis. For me, there are so many benefits of living downtown that make the increased cost of living well worth it, but different people have different needs/lifestyles. I like to see lots of plays, try lots of new restaurants, and generally feel the vibrancy of all the people the city draws. I like to walk to work and have the latest and greatest at my fingertips.

Chicago is truly, in my opinion, the most livable of America's large cities. You get the best of the urban atmosphere without sacrificing the "neighborhood feel". I grew up in the city - graduated from a city (albeit private) high school - and it exposed me to things I would not have experienced perhaps in the suburbs. I was a pretty savvy kid by the time I hit college. I can't wait to raise my kids here too.

Ok, it wasn't from the tourist bureau, but it could have been. ;-)

Personally, I agree with much of this last commenter's thoughts. I love Chicago too. However, it is expensive and, like I've said before, it's a lifestyle choice.

I've lived in towns as small as 3,000 people and cities as large as Washington, D.C. I prefer the (often unrecognized) benefits of the suburbs of a mid-sized city. It gives me and my family the lifestyle we like -- and at a much cheaper cost than living in most other places.

June 28, 2006

Here's a piece from Kiplinger's that probably rings a bell with many people out there living paycheck to paycheck. It's really just simple personal finance advice that I've covered before, but sometimes the best financial advice is just covering the basics. Besides, it's not like most people are doing these things -- otherwise, who would need a personal finance blog to make such suggestions? ;-)

Anyway, here are some of Kiplinger's thoughts (in green) along with commentary and corresponding post links from me:

The first step toward breaking out of the paycheck-to-paycheck cycle is to track your spending on a daily basis -- down to how much you paid for a cup of coffee.

To stay within your budget and reach your goals, you might have to cut costs. [Some ideas]:

Find deals.

Lower insurance costs.

Cut interest rates.

Avoid unnecessary fees.

There are lots of money saving ideas here at Free Money Finance. See this link that leads to my saving money category.

Another way to help avoid living paycheck to paycheck is to increase your income -- without begging for a raise or switching careers. Start by adjusting the amount of taxes being withheld from your paycheck. Our user-friendly calculator can give you an idea of how many more withholding allowances you should be claiming on your W-4 form.

Then look for other ways to keep more of your paycheck going into your pocket instead of Uncle Sam's. For example, employer-sponsored programs that allow you to contribute pre-tax money toward routine expenses -- such as health care, child care or retirement savings -- can help your paycheck go further. Or make the most of your cash by using tax-advantaged plans outside the workplace.

At Free Money Finance, I regularly run articles that suggest how you can make the most of your career. Here's another really good one to add to that list -- a piece on six career secrets you won't learn in school from Career Builder. Their advice:

1. This is good advice. In my 18 years in business, I can say from experience that all six of these "secrets" are needed in the workforce if you want to be successful and distinguish yourself from the pack.

2. There's a BIG difference between what it takes to be successful in college and what it takes to be successful in the working world. In fact, my most valuable skills in college were the ones that were required to do well at school -- time management, discipline, focus, communication, etc. -- not necessarily the learning itself. That's why I am of the opinion that work experience trumps education (after you get your first job -- which, of course, college helps you to get).

3. I've suggested several ways to make the most out of your career. Here are some of the ideas I've offered:

Here's another excerpt from Wealth by Stuart Lucas. I liked the book -- giving it 6 stars. So it's my pleasure to offer this excerpt from Chapter 5:

So how does one effectively navigate the wealth management industry today? It isn’t easy, but you can do it. I like to think of the industry today as being divided into three unique worlds. I describe these three worlds as “The Enchanted Forest,” “The Capital Kibbutz,” and “The Secret Society.”

The Enchanted Forest

I refer to the first world as “The Enchanted Forest.” It is an investment land populated by ambitious clients and equally ambitious wealth advisors, both looking for the secret formula to investment success.

On its face, The Enchanted Forest is a beautiful and alluring place—its people energetic, entrepreneurial, and gregarious. The wealth advisors who live in The Enchanted Forest, for example, are compelling salespeople who regale prospective investors with stories of their investment prowess and client success. They offer to act as financial guides to neophyte investors who can’t understand the markets and who don’t really want to understand the vagaries and complexities of investment, asset allocation, stock diversification, and wealth management goal setting.

For their part, the clients you find in The Enchanted Forest are usually in search of easy keys to prosperity and financial success. In many cases, newly (or soon to be) wealthy people are open to suggestions and vulnerable to persuasion—traits that can make them easy prey for advisors who overwhelm them with financial jargon and promises of quick market success.

As a result, marriages of convenience often take place in The Enchanted Forest—between ambitious wealth industry people on the one hand and eager and impressionable investors on the other.

The Secret Society

“The Secret Society” (not to be confused with some fraternity or elite military organization) is a domain for those who have figured out how to add value (“positive alpha”) to investment assets. It is the world of hedge funds, private equity funds, concentrated actively-managed mutual funds, and opportunistic real estate professionals that outperform standard investments. It is also the world of skilled business owners and people who leverage their careers to great business and financial advantage. Finally, it is a world widely speculated about in the pages of business and finance magazines because most of its players like to keep low profiles and actively avoid the press.

In the domain of The Secret Society, inhabitants have learned how to consistently add value through good investment performance. An investor is able to create this so-called “positive alpha” by identifying and extracting value from individual companies or securities, or by choosing other professionals who have this skill. This is a rare and highly-refined wealth management competence. Those who do it well have highly-developed instincts. They also have deep investment expertise and resources to measure investment performance. But you don’t know who these people are because they try to keep what they do secret. The last thing most of them want is competition.

The Capital Kibbutz

Finally, after The Enchanted Forest and The Secret Society, there’s a world of investing I call “The Capital Kibbutz.”

For those who don’t know what a kibbutz is, it is a form of communal living practiced in Israel in which everyone in the community shares in the resources and wealth that come to that community. There are actually kibbutz-like communities in many other parts of the world, including the U.S.

The Capital Kibbutz is an investment zone in which everyone who participates shares in the rewards and risks of investment together. It is populated by institutions and individual advisors that can help clients who want to participate in the growth of the global economy but who recognize that they don’t have sufficient expertise or resources to engage in Active Alpha Investing. It thus provides the perfect sanctuary for these investors to reside in.

For all practical purposes, The Capital Kibbutz is the world of indexed mutual funds, exchange traded funds, and term life insurance. It is a rather safe and tame investment world—one where the investor is taken care of but in which the investor rarely, if ever, gets a chance to take big risks.

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I never knew I lived in an investment kibbutz. But I do like being taken care of and not having to take big risks. ;-)

Our winner of yesterday's Career Intensity book giveaway was: Steve K. (comment posted at 11:03 pm yesterday) Congrats! Be sure to email me the name and address where you want the book to be sent as well as if you want the author to sign it for you or to a special person (I'll need the name). I'll send you a confirmation email that I got your note. If you don't hear from me, I didn't get your email. BTW, the books are shipped out every Friday by media mail, which can take 2-3 weeks to receive from the time they are mailed.

For the rest of you, there's another giveaway today. Here's how the giveaway works:

2. All you need to do is leave a comment on that post (only one comment/entry per person, please). This will enter you in the drawing for that day.

3. Sometime the next day (usually in the morning, but not always, my schedule won't allow it) I'll announce the winner for the previous day's giveaway as well as the new giveaway for that day.

4. If you're named the winner, you'll need to email me the name and address where the book should be sent. Note: I will not be sending you an email telling you you've won, you'll need to check the site. If you want to look at all the posts/winners, click on my giveaway category link. If I don't hear from you in a week, I will give the book to someone else.

The first person to leave a comment, any comment, below wins a free copy of Career Intensity.

Once you comment and see that you're first, be sure to email me the name and address where you want the book to be sent as well as if you want the author to sign it for you or to a special person (I'll need the name). I'll send you a confirmation email that I got your note. If you don't hear from me, I didn't get your email. BTW, the books are shipped out every Friday by media mail, which can take 2-3 weeks to receive from the time they are mailed. If you want to look at all the posts/winners, click on my giveaway category link. If I don't hear from you in a week, I will give the book to someone else.

As for rules, they simply are:

1. Once you win a book, you can't win another one. But if you have won a previous giveaway here at Free Money Finance, as long as it wasn't for this book, you are eligible to win this book.

Give creatively. You can "express love twice with one gift" by giving a donation to a favorite charity in the names of friends or family members instead of buying them something for birthdays and holidays, Robin suggested. You and the recipient have the satisfaction of knowing the money is being used for a good cause, and you get to take a tax deduction if you itemize.

This works for me. I like giving and I like "expressing love," so what's not to like? My advice based on past experience is to be sure the charity you select is one the recipient will like as well. You don't want to give a donation to the NRA if the recipient is in favor of stronger gun control. It kind of ruins the joy of the gift. ;-)

I usually go with an organization like Samaritan's Purse that everyone can support. Who doesn't like helping the poor, needy, and those affected by natural disasters?

I completely agree about focusing on your career and becoming an expert at whatever you do. I have struggled with wanting to dabble in various areas of life, which is not a bad thing, but to become successful you must love what you do and be an expert about it. It is absolutely true that your income and career is your greatest wealthy building tool.

Education is important, but how you apply that education is essential to it being effective. You can have an MBA, but if you are not great at working with people, motivated, and passionate about what you do, you will never use that education to its fullest extent.

Yes, you need both -- an education and the abilities to make the most of it in the workplace.

Here's the second comment:

Being an expert in a particular area generally involves excellent skills at a very small number of things. However, it also involves a minimum level of skill at various peripheral things. For example, no matter how technical your area of expertise is, being able to communicate effectively about it is a skill worth cultivating. I personally find little need to speak to large audiences, but I can't ignore the need to communicate in writing and speaking to small groups.

Furthermore, it is never a mistake to understand how your employer and/or customers make money. Know what they make a profit at and what is costing them. Your value to them lies in how you can improve that bottom line, either by increasing profits or decreasing costs.

This is good advice too and I agree with it 100%. Apply it to your career and you'll be much better off than if you simply let your work performance "happen" around you.

According to polls, June graduates expect to receive an annual starting salary of about $42,500 with an average signing bonus of $2,841.

So, they start out earning $42,500. Assuming they work for 43 years (starting at 22, ending at 65), they will earn the following in their lifetimes with the corresponding salary growth rates noted below:

If their salary grows 3% a year, they'll earn $3.6 million in their lifetimes.

If their salary grows 5% a year, they'll earn $6.1 million in their lifetimes.

If their salary grows 7% a year, they'll earn $10.5 million in their lifetimes.

If their salary grows 10% a year, they'll earn $25.2 million in their lifetimes.

June 27, 2006

This topic really gets me miffed! I think the media and the people ought to be all over this more than they are.

1. We have a tax system by our government that is so complicated that we need to have "Professionals" do them.

2. Then our government doesn't oversee the "Professionals" who do our complicated taxes.

3. Then we can get severely penalized by our government for handing our taxes over to "Professionals" who either can't figure it out right because the tax code is so obfuscated or the preparer is crooked.

I am sure there are no politicians lobbying out there for us or they would see what a major problem this tax code is.

Generally, I'm in agreement with this opinion. Our tax code is waaaaaaaaaaaaay too complicated. Isn't there some sort of way that it can be simplified and at the same time be made fair? I'm doubtful about it given the special interests that swarm around D.C. In my opinion, anything representing a fair and easy tax code will be very difficult to develop because of too many people with too much money influencing politics and laws in their own favor.

Here's a money saving tip that I've advocated on blogs (in comments) as well as verbally to people I know, so I thought I might as well share it with you. It's a great idea on how to save on the cost of roses:

Start your own rose garden.

Here's how it happened with me:

My wife loves flowers, but hates to spend the money it takes to buy them (let's fact it, even at the cheapest places roses will still run $10-$15 a dozen -- up to $75 or more for long-stem roses delivered). So I planted a small rose garden with 12 bushes in front of our house (either side of the door). I had to rip out a low-growing bush-like thing the former owners had, but after that, it was simple. I spent $20-$25 on each bush (the price for good rose bushes) and now get anywhere from 100 to 400 roses PER BUSH PER YEAR (I've had the garden for three years now).

I spend the summer stocking our house with roses (which my wife and daughter love), giving them to co-workers, offering them in a nice vase ($2 at Wal-mart) as graduation gifts for lesser-known friends, taking them to work for all the ladies, giving them to friends who are sick, etc. It makes me quite the popular guy, as I'm sure you can imagine. Plus, there's just something about saying "I grew these" that makes them extra special and gives them something money can't buy.

I've talked before about the idea of retiring in style south of the border -- how you can often live like a king or queen in Central and South America for a fraction of what it costs to live in the United States. For those people who will be well short of the needed financial resources at retirement, and there are a lot of them, this is a very viable option.

The answer for a growing number of Americans making the leap into early retirement is moving to a country with a lower cost of living. The U.S. State Department estimates some 4 million Americans live abroad, not counting military and embassy folks. About a quarter of those are estimated to be retirees.

Poke around on the Web, and you'll find a whole industry devoted to retirees looking to live like a despot on $15 a day -- usually under tropical skies with daily maid service and umbrella-bedecked drinks thrown in for good measure.

But it's not all fun and games. This option really works best for the right kind of people. What kind is that? According to Money Central, here are the qualities that will make someone a good fit to live in a foreign country:

You're willing to make new friends

You're open to experiencing a new culture

You're not a Type A personality

You're willing to do some research

You have an exit strategy

I can only claim to have three of the five traits mentioned here, so I'm not so sure that this option would work for me. In addition, I'm well on my way to saving for a great retirement here in the States, so I don't really need this solution to make retirement work for me. That said, I wouldn't mind a tropical sky with daily maid service and umbrella-bedecked drinks thrown in for good measure. :-)

Our winner of Thursday's Career Intensity book giveaway was: Justin (comment posted at 2:33 pm on the 22nd) Congrats! Be sure to email me the name and address where you want the book to be sent as well as if you want the author to sign it for you or to a special person (I'll need the name). I'll send you a confirmation email that I got your note. If you don't hear from me, I didn't get your email. BTW, the books are shipped out every Friday by media mail, which can take 2-3 weeks to receive from the time they are mailed.

For the rest of you, there's another giveaway today. Here's how the giveaway works:

2. All you need to do is leave a comment on that post (only one comment/entry per person, please). This will enter you in the drawing for that day.

3. Sometime the next day (usually in the morning, but not always, my schedule won't allow it) I'll announce the winner for the previous day's giveaway as well as the new giveaway for that day.

4. If you're named the winner, you'll need to email me the name and address where the book should be sent. Note: I will not be sending you an email telling you you've won, you'll need to check the site. If you want to look at all the posts/winners, click on my giveaway category link. If I don't hear from you in a week, I will give the book to someone else.

Here's another excerpt from Wealth by Stuart Lucas. I liked the book -- giving it 6 stars. So it's my pleasure to offer this excerpt from Chapter 5:

With open architecture, the total shape of your investment program is even more important than the individual mutual funds, stocks, hedge funds, or other products in your portfolio. Remember that from 1984 to 2004, the average mutual fund generated a return of 9.9% but the average investor only earned 6.6%. With all the upheaval (mergers, deregulation, and re-regulation) that’s taking place in the private client business, there doesn’t seem to be much focus on helping individual investors acquire The Four A’s of investing.

If your private client portfolio is simple, you don’t need to build The Four A’s beyond a basic level. And you can achieve that basic level on your own. However, if you want to invest the way institutions invest, in specialized products and in things like venture capital or hedge funds, you have to be just as skilled as they are to have a chance of winning. Just how tough is this?

How Can You Distinguish Among Wealth Advisors?

There are few businesses where salespeople can make more money than in wealth management. As a result, the industry attracts many bright individuals. These are the folks that most individual investors hire in hopes of achieving The Four A’s needed to compete using complex strategies and products. Wealth management professionals are highly competitive, have a nose for new business, and possess great powers of persuasion. They exude success and smarts, wear designer suits, carry platinum credit cards and thick pitch books, and they are supported with billions in advertising dollars.

To the inexperienced person with newly liquid assets, salespeople from wealth management firms present two challenges. First, a prospective client can potentially sit through hours of PowerPoint presentations from different wealth management firms outlining their investment options without being able to truly differentiate one value proposition from another. Second, in these interactions, it can be even tougher to discern the track records of individual advisors in adding value to their clients, even when they work for firms with good reputations.

Today, some advisors have a strict fiduciary duty to put their clients’ interests first, as defined by the Securities and Exchange Commission (SEC). Investment advisory firms and their representatives have this duty. Broker dealers and their registered representatives meanwhile operate under a different set of guidelines, defined by the National Association of Securities Dealers (NASD). Hedge fund managers and bankers do not have a strict fiduciary duty. Neither do many salespeople of life insurance or annuities.

Some salespeople operate under more than one set of compliance rules. At the same time, laws and regulations designed to curb abuses by wealth management practitioners, no matter how carefully crafted, contain nuances and loopholes that leave clients open to exploitation. The strict regulatory environment governing mutual funds, for example, hasn’t prevented recent improper trading scandals.

So, how do you measure one wealth advisor’s knowledge of financial markets against that of others? How do you gauge a person’s instinct for the market, his or her knowledge of emerging market trends, or the degree to which he or she is ethical in their everyday client interactions?-----------------------------------------------------------------

Kind of leaves us hanging, doesn't it? Don't worry, we'll have more on this tomorrow. Stop by then for a continuation of this topic.

The first person to leave a comment, any comment, below wins a free copy of Career Intensity.

Once you comment and see that you're first, be sure to email me the name and address where you want the book to be sent as well as if you want the author to sign it for you or to a special person (I'll need the name). I'll send you a confirmation email that I got your note. If you don't hear from me, I didn't get your email. BTW, the books are shipped out every Friday by media mail, which can take 2-3 weeks to receive from the time they are mailed. If you want to look at all the posts/winners, click on my giveaway category link. If I don't hear from you in a week, I will give the book to someone else.

As for rules, they simply are:

1. Once you win a book, you can't win another one. But if you have won a previous giveaway here at Free Money Finance, as long as it wasn't for this book, you are eligible to win this book.

Shop sparingly. Ever go to a mall thinking you'll buy one thing then just browse and see what else you need? Much of the shopping we do is what she characterizes as frivolous shopping. "It's a huge money sink. It's what we spend unconsciously, habitually, impulsively," she said.

In short, stay out of the mall if you're not looking for something specifically. And if you are, get it and get out. How often have we all gone to a store to get something, bought it, then decided to just walk a few steps over to another store. Then, on the way we see a coffee stand where we HAVE to get a coffee ($4). And what's a coffee without a cookie or doughnut ($2)? Then, when we finally get to the other store we see a display of X, Y, or Z that we have to have ($20) -- though we didn't know we had to have it until we saw it there. Yep, it's a cycle we all know far too well in America.

This goes for other stores as well, just not mall stores. If you want to save money, don't go to any store to just pass time. You'll most certainly spend more than you would if you hadn't gone. Instead, take a walk, go to the park or visit a free museum. You'll not only save money, but may even improve your physical fitness too. And these benefits are worth more than money!

For those of you who don't know, this carnival is about frugal living and saving money. (BTW, entries not matching this description have been left out.)

I'm sticking with my usual method of hosting a carnival -- listing a summary of each piece with the author's reason for submitting the post to the carnival (for those that submitted one) and/or a bit of the post itself as a summary -- so you readers know what to expect before you get to the post.

With that said, here we go:

Is It Possible to Be a Frugal Collector? - This entry is essentially a meditation on whether it's possible to be a collector (of comics or dolls or whatever) and still be frugal. The best part is the comments.

Frugal Party Planning - We've been partying at our house lately. This month we've hosted a graduation party for my daughter and a birthday party for my son. I tried to make my money go farther for these celebrations by planning ahead. Here's some of what worked for me.

Tips from my freezer - Inside my freezer you can find evidence of frugality. Join me for a look inside.

Leftovers How To: It's All About Presentation (Part I) - People tell me it's hard to get kids to eat leftovers. My family is a little bit different. My biological children and my niece know how to make themselves something to eat, reheat or reinvent leftovers. The oldest won't eat or reheat leftovers, he wasn't raised by me... Anyway, to solve this problem I decided to use different tactics. Maybe he doesn't want to eat reheated food, but what if it doesn't look like leftovers?

See a Penny, Pick it Up - Even if you only dropped a penny it is probably worth your time to pick it up. It shouldn't take more than five seconds to pick it up. That works out to 60 cents a minute which comes out to $36 an hour.

Not Much Stomach For Gambling - Although I'm an aggressive investor when it comes to mutual funds, I really don't have the risk tolerance to watch money disappear in casinos (or in individual stocks!)

June 22, 2006

In all this talk about money, I often lose myself in just that -- money, money, money. Though I don't mean for it too, sometimes it just overwhelms me and becomes too much of a focus. Too much of a focus, that is, compared to what I want it to be.

Another thing I like to do to re-focus now and then is think about all the things I'm thankful for. It moves me away from thinking about money to what matters most in my life. A few of the things I'm thankful for:

My faith

My family - immediate family and my mom, dad, and several close relatives

Good friends

Good health

A wonderful job with great co-workers

KFC 3-piece meals ;-)

Time to relax and enjoy it all

So what about you? What are you thankful for? Leave your thoughts in the comments below to help yourself and others shift our focus -- if only for a little while.

Here's a question that seems to come up again and again: is it worth it for both parents to work or are they better off financially (not to mention emotionally, etc.) if one stays home? I've written about this topic a few times already. For background, see these posts:

When considering whether two paychecks are worth it, figure out how much of the lower earner's salary will be eaten by expenses incurred if both parents work.

In other words, if the lower earner earns $30,000 a year, but between taxes, child care, transportation, clothing and other costs the additional expenses are $25,000, you have to ask yourself if all the added frustration and hecticness is worth $5k a year. Then again, there may be great fulfillment in a job (or you may be working with the promise/hope of a future, larger payoff). In these cases, you can't put a firm number on many of the qualitative benefits, but you'll need to try to at least estimate their value.

In addition, you need to consider the costs of staying at home such as the (obvious) pay cut, potential loss of (additional cost of) benefits (retirement, medical, insurance), and even foregoing tuition discounts. The retirement benefits can be especially big if you lose access to a 401k where the employer matches part of your contribution. As Money says:

Compounded over time, those lost savings opportunities can equal tens, if not hundreds of thousands of dollars.

In the end, there's really no right answer -- every family will need to decide for themselves based on their values. But here's Money's attempt at giving some guidance:

If you're living paycheck to paycheck, that second salary is likely to be critical no matter how little is left over.

But if you have some cushion, don't just look at the numbers. They may support one decision over another, but they may not square with what your heart and mind are telling you. After all, life is expensive, the well-being of kids is paramount and a parent's career is important not only for the money but often for a sense of identity and satisfaction.

SPECIAL NOTE: I'm going on vacation for the next few days, so there will be no giveaways on June 23-26. The winner of this giveaway will be named on June 27 and we'll have one giveaway per day on June 27-30.

I'm giving away free books the entire month of June!!!!!

Our winner of yesterday's Career Intensity book giveaway was: Jim (comment posted at 1:30 pm yesterday) Congrats! Be sure to email me the name and address where you want the book to be sent as well as if you want the author to sign it for you or to a special person (I'll need the name). I'll send you a confirmation email that I got your note. If you don't hear from me, I didn't get your email. BTW, the books are shipped out every Friday by media mail, which can take 2-3 weeks to receive from the time they are mailed.

For the rest of you, there's another giveaway today. Here's how the giveaway works:

2. All you need to do is leave a comment on that post (only one comment/entry per person, please). This will enter you in the drawing for that day.

3. Sometime the next day (usually in the morning, but not always, my schedule won't allow it) I'll announce the winner for the previous day's giveaway as well as the new giveaway for that day.

4. If you're named the winner, you'll need to email me the name and address where the book should be sent. Note: I will not be sending you an email telling you you've won, you'll need to check the site. If you want to look at all the posts/winners, click on my giveaway category link. If I don't hear from you in a week, I will give the book to someone else.

Solution: You can tell him if you like. But if you're not comfortable with that, you can always say "I'd rather not talk about that." Or give a vague answer such as "I make enough to pay the bills," "I make pretty good money," or "I'm struggling a bit, but I'm getting by." Or you could always return the question with another question, "Why do you ask?"

If it's a close friend, I'd tell him. It's not a big deal to me. Besides, I'd want to know what he made, and he'd be obligated to tell me after I told him. ;-)

If it's someone who I didn't know well and is just being nosy, I'd hit them with the, "Why do you ask?" Then, I'd make them tell me what they make first. At that point, I'd probably tell them what I earn.

A couple months ago I reviewed Wealth by Stuart Lucas. I liked the book -- giving it 6 stars. So it's my pleasure to offer this excerpt from Chapter 5 of the book:

In 1974, a landmark piece of legislation was passed by Congress that injected the financial markets with unprecedented creativity and entrepreneurialism and at the same time made them a more dangerous place for the individual investor. This legislation was called the Employee Retirement Income Security Act, or ERISA.

The enactment of ERISA into law proved a major boon for institutional investors. Although the legislation was directed principally at pension funds, it changed the thinking of many other institutional investors, such as endowments and foundations, and eventually the market for wealth management services. After ERISA became law, institutional investors diversified their investments out of traditional stock and bond portfolios, managed by banks and traditional investment houses, and began to invest with specialized boutique money managers and investment firms. “Open architecture” was born, and with it came the opportunity for institutional investors to take advantage of a wide range of proprietary and highly innovative products offered by organizations of widely different structures and sizes. Open architecture offered institutional investors the opportunity for much greater returns on their investments than had been possible in the pre-ERISA environment.

The Four A’s

The more forward-thinking institutions realized that the opportunity for greater returns equated with greater need to analyze risk correctly. They saw that managing effectively in this new environment demanded that they develop strong in-house competencies to manage their investments. In the mid-1980s, David Swenson, Chief Investment Officer of the Yale University Endowment, and Jack Meyer, the Chief Executive Officer of Harvard University’s endowment, became innovative Active Alpha investors, aggressively investing in real estate, private equity, venture capital, risk arbitrage, distressed debt, and emerging markets. As the investment portfolios got more complicated, Meyer, Swenson, and others focused on building strong in-house competencies in four key investment areas. I refer to these as “The Four A’s”:

Acumen. Large institutional investors recognized that the most important success factor in investing was the accurate identification of investment opportunity. So, they developed strong expertise in the areas of research, professional oversight, quality administration, and sophisticated systems. These resources are expensive and are best amortized over a substantial asset base. Only large institutional investors can afford this.

Access. Scale, sophistication, and long time horizons are all attributes that help investors gain access to the most attractive investment opportunities. Large institutional investors recognized this and began leveraging the scale of their assets to achieve access to the best opportunities and the finest talent in traditional and alternative investments.

Alignment of Interests. Client/advisor alignment was pioneered by large institutions in order to protect their long-term investment interests. The belief was that investment managers entrusted with managing money should share appropriately in both success and failure, and conflicts of interest should be avoided or, at the very least, managed with the clients’ interests put first.

Accountability. Large institutional investors pioneered the use of strong administrative and accountability systems to measure fund/advisor/manager performance. Such systems are critical in giving pension plan managers, endowment directors, and other institutional decision makers the management information they need to act with confidence. Accountability in its broadest sense involves tracking fund performance, measuring/monitoring manager performance, and flagging problems if and when they arise.

Leading institutional investors attracted experienced professionals to construct and manage their portfolios. They did detailed research on portfolio construction, the behavior of asset classes, and the skills and ethics of managers. They hired staffs to assemble and aggregate, often by hand, the performance information they compiled from managers. They researched the amount of risk individual managers took to achieve particular returns. The same staff also double-checked the bookkeeping of their investment advisors in the same way that you and I might balance our checkbooks.

To assist such institutions with investment planning, a whole consulting industry blossomed in the wake of ERISA and is still a leading intellectual force in the investment world today.

Just a note to all of you that I'll be on vacation from June 23 through June 26 (returning on June 27 when I host the Festival of Frugality). On the days that I'm gone, I've set it up so that there will be highlights of posts I wrote this week last year. I figure that since I didn't have many readers then, most of this stuff will be new to most people. Plus, for the newer folks, it will give an insight into where my posts started and how they've developed into the ones I put up now.

Hope you enjoy the posts. I'll be sure to say "hi" to jolly old Pittsburgh for ya! ;-)

Weddings, weddings, weddings take money, money, money -- and more and more of it every day. Here are some current stats on the cost of weddings from Michelle Singletary:

These days it costs as much to have a wedding as it does to buy a new car. The Conde Nast Bridal Group, which publishes Brides, Modern Bride and Elegant Bride magazines, says the average amount spent on weddings has increased to $27,852, up from $15,208 in 1990.

Ouch!

Fortunately, there are several ways you can cut the costs of a wedding if you really want to. Check out these posts to see how:

Michelle goes on in the piece to describe a new trend in weddings that I didn't know anything about until reading this article. It's about "destination weddings." These are weddings where the couple travels to some (usually exotic) location to get married and invites friends and family to do the same. The problem? The friends and family have to shell out a bunch of money just to get to the event (imagine flying to Hawaii to attend a wedding). Here are some key quotes from the piece:

About 16 percent of all couples have a destination wedding, a 400 percent increase in the past 10 years, according to Conde Nast. Couples who have destination weddings spend an average of $25,806, with 63 guests attending.

One recent wedding guest, who spoke on the condition that she would not be named for fear of retaliation from the happy couple, said she was not so happy when she found out how much she and her family would have to pay to attend a Caribbean wedding of this close relative. The airfares alone cost $1,200.

"They picked the most expensive resort on the island at $600 a night," the woman said. "That just flipped me out. I thought it was a huge imposition to put that kind of financial burden on us."

This issue came up during one of my recent online discussions. A reader wrote: "I have a very close girlfriend who is hosting a [distant] wedding this December outside the country. The price for my husband and [me] to attend is roughly $3,000. We just bought a house and do not want to take from our emergency savings to go. Is that wrong? She was at our wedding and is upset that we are not going."

Now here's the kicker. It seems that the hosts of these events tend to get ticked off if their friends don't want to fork over a couple thousand dollars to come to the wedding. (Yes, you read that correctly. I know, the nerve of some people.) Anyway, several people have written in to Michelle and asked what they should do -- they don't want to spend the money but their friends are mad at them not coming. What should they do? Here's what Michelle says:

It's most certainly not wrong or poor etiquette to decline a wedding invitation if you can't afford to attend for financial or any other reasons. If a bride or groom or both order you to come or else, choose the "or else." You'll be better off.

You know, in all my years of writing and reading about personal finances, you would have thought that I would have heard it all by now. But then something like this comes along. Unbelievable.

The worst part is that I'm not sure what amazes me the most -- the high costs of weddings or the gall of some people to demand friends spend a mini-fortune to attend their remote wedding.

I'm with Michelle -- if you can't afford it (or don't want to pay for a big trip to a wedding), decline the invitation, and your friends are mad at you, then you're better off without them. Who needs friends like that anyway?

Am I way off base on this one? Someone out there please tell me that I'm not the only one who sees the craziness of this.

BTW, here's what we plan to do with our kids' weddings. We're going to give them one (fairly large) check that will serve as our "present" to them and their spouse. They can then do whatever they want with the money -- spend it on a lavish wedding or go smaller with the wedding and make a nice downpayment on a house. It's their choice. But once it's used, that's it.

Financial concerns may be the first reasons older workers offer to explain why they're staying on the job, but researchers have found that one deeper reason--the need to make a meaningful contribution--is often the more important motivating factor.

"At a certain time of life--call it midlife--you look beyond just making a living for yourself and your family to thinking about what your contribution is or could be," says Marika Stone, co-author, with her husband, Howard, of Too Young to Retire. He speaks and gives courses on the concept of pursuing a "renaissance" rather than a retirement, while she promotes the idea on their website, 2young2retire.com, and in her work as a yoga instructor. "I've come to believe it's hard-wired into us as human beings--this ancient turning inward," she says.

I must admit, I'm in this transition process -- moving from simply earning money to wanting to make a difference. And I hope to make a (bigger) difference in retirement -- but working at least part-time for a non-profit organization.

How about you? Anyone out there thinking about how to help out others and make a difference in their lives?

Solution: Friends should feel free to treat each other now and then, but you don't want to be a doormat. Offer to help your friend think of solutions to improve his financial situation so he doesn't have to rely on you so much. And don't be afraid to just say "no" when he asks for something. Just make sure to give your refusal a positive spin.

Here's my solution: simply don't let yourself be victimized. I've had friends in tight spots before and have helped them out, that's one thing, but to have a person consistently mooch off me -- nope, I won't let it happen. I simply won't pay for them -- it's that simple. Remember, it takes two for this to happen -- they have to be mooch-ers and you have to allow yourself to be a mooch-ee. Don't do it!

Our winner of yesterday's Career Intensity book giveaway was: Glenn (comment posted at 11:20 am yesterday) Congrats! Be sure to email me the name and address where you want the book to be sent as well as if you want the author to sign it for you or to a special person (I'll need the name). I'll send you a confirmation email that I got your note. If you don't hear from me, I didn't get your email. BTW, the books are shipped out every Friday by media mail, which can take 2-3 weeks to receive from the time they are mailed.

For the rest of you, there's another giveaway today. Here's how the giveaway works:

2. All you need to do is leave a comment on that post (only one comment/entry per person, please). This will enter you in the drawing for that day.

3. Sometime the next day (usually in the morning, but not always, my schedule won't allow it) I'll announce the winner for the previous day's giveaway as well as the new giveaway for that day.

4. If you're named the winner, you'll need to email me the name and address where the book should be sent. Note: I will not be sending you an email telling you you've won, you'll need to check the site. If you want to look at all the posts/winners, click on my giveaway category link. If I don't hear from you in a week, I will give the book to someone else.

Here's part 3 of my interview with Stuart Lucas, author of Wealth. I liked the book -- giving it 6 stars -- and I think you'll like this interview. Here goes:

Free Money Finance (FMF): Where are most people missing it in managing their money? What are the problems you see the most?

Stuart Lucas (SL): Most individual investors think that the money managers they have access to will generate above average returns – whether long only funds, hedge funds or private equity. Achieving this goal is extremely difficult in what has got to be the most competitive business in the world.

So what happens? Money managers who try to outperform are much better paid than those that run index funds, regardless of their performance, and that compensation comes straight out of the investor’s pocket. Managers that try to outperform almost always create more taxable transactions, which benefits our nation’s tax rolls. Again, the money comes straight out of the investor’s pocket. All the smart, well educated managers who underperform create the opportunity for a few exceptional people to generate impressive results. These proven managers can attract anyone’s money in vastly greater quantities today than they can prudently invest. What makes you think they want yours?

FMF: This isn't covered in the book, but I'm interested to know -- why do you work? It appears from the book that you're independently wealthy yet you have a distinguished educational and employment background. Why do you choose to work?

SL: Some of the people I admire most are those that work the hardest, but don’t have to. We live in a society that spends billions each year trying to convince us to consume – and to do it now rather than when we can afford it. This kind of consumption provides immediate gratification for the buyer and profits for the seller, but the behavior adds little to long term satisfaction and feelings of self esteem. I see lots of people that get caught up in this merry-go-round and it isn’t pretty.

It is my belief that true satisfaction comes from being useful to others in an honest and ethical way. Doing so requires hard work. I also want to be a role model for my children. They are way too smart to fall for “Do as I say, not as I do.”

FMF: Can you share your thoughts on giving and, in particular, how the average person should look at giving as part of his overall financial planning?

SL: I prefer to think of it as community service – giving of our money and/or our skills. Both are in short supply; either can contribute powerfully. Of course, the effects of your community service can be even more powerful if you give both at the same time. Over the years I have found that community service has also been richly rewarding for me. I have learned a great deal, made wonderful friends and service to others gives my life additional meaning. This is true regardless of one’s means.

FMF: Is there anything else you’d like to tell readers of Free Money Finance about managing their money?

SL: Take charge of your wealth. You will benefit enormously by doing so. Thank you.

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My thoughts on this:

1. "Money managers who try to outperform are much better paid than those that run index funds, regardless of their performance, and that compensation comes straight out of the investor’s pocket. Managers that try to outperform almost always create more taxable transactions, which benefits our nation’s tax rolls. Again, the money comes straight out of the investor’s pocket."

Sounds like a good argument for index funds to me.

2. I admire Stuart for both his work ethic and commitment to community service.

3. "Take charge of your wealth." There's not much more to say. This is what I encourage and it's one of the guiding principles at Free Money Finance -- you need to know and apply good, solid financial principles and not count on others to manage your money for you.

For most of us, our main earning asset is our selves. We make much more from our labor than from our investments unless we're in a super rarefied stratum. If we work smart, operate with an eye on what works, we get ahead and make a decent livelihood.

In my (almost) 20-year career in business, I've found that #2, #4 and #5 are very, very important. If you can produce business results (and the more, the better -- especially when compared to co-workers), work hard -- putting in the time necessary to over-perform expectations, and develop relationships with superiors, co-workers, other business people and the like, you'll go far in your career. And, as a result, your career will reward you financially for doing so. ;-)

Here's another one of those "oh those poor college students, they are graduating with so much debt" stories that I'm seeing more and more of. Like all great journalism, it takes one small fact (some graduates have six-figure debts when they leave) and acts as if that's somehow 1) the soon-to-be norm, 2) something not totally unusual, and 3) that the people racking up this sort of debt don't have questionable judgment. Sheesh!!!!

I'm not even going to comment on the guy who has over $100k in debt from getting a graduate degree in public policy. Re-read that last statement a couple times -- I think it's self-explanatory where this guy went wrong.

Anyway, here are the real facts:

The average college senior graduated this year with more than $19,000 in debt.

Sandy Baum, a policy analyst for the College Board, a membership group for colleges and universities, says there's always been a "small subset" of graduates with unmanageable debt, but they're not reflective of the typical borrower. Among the two-thirds of graduates with student loans, she says, the median sum (half are more and half are less) is $15,500 for public-school graduates and $19,400 for private-school graduates.

"It's very important to understand that most students graduate with no debt or a very manageable level of debt," Baum says. "That doesn't mean we shouldn't worry about" those students who are weighed down by much larger debt, she adds.

And here's the bottomline -- hidden near the end of this long article:

Still, students remain willing to load up on loans in large part because studies have long shown that an investment in college pays off. The Census Bureau has estimated that college graduates will earn about $1 million more over their lifetimes than individuals with only a high school diploma.

This said, you want to minimize college expenses (of course) as much as you can. You can't simply borrow like a fiend and not think about the re-payment consequences. That's what this article misses that really burns me up!

So for those of you looking at ways to save for, save on, or pay for college, see these posts: